Private banking 2008: When the ultra-wealthy bump into the sub-prime
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Private banking 2008: When the ultra-wealthy bump into the sub-prime

Private banks attached to investment banks have benefited from the access to balance sheet and innovative products that the relationship provides. But with Wall Street suffering dramatic losses as a result of sub-prime mortgage exposure, will that relationship be the private banks’ downfall? Helen Avery reports.


WHEN UBS ANNOUNCED that it would be selling a stake to investors in Singapore and the Middle East in December, it highlighted the vulnerability of private banks that have investment banking businesses attached to them. As UBS’s chief executive, Marcel Rohner, put it during the announcement: "An investment bank can and will incur losses. But it should never drag the whole group into loss-making territory. Wealth management clients don’t like this uncertainty."

At the end of the third quarter of 2007, UBS’s wealth management business posted a record pre-tax profit but its investment banking business line recorded a loss of almost SFr3.7 billion ($3.23 billion). Since then, the firm has announced a $10 billion writedown because of sub-prime exposure at the investment bank.

Although private banking is continuing to raise assets – UBS reportedly took on SFr30 billion in high-net-worth money in October and November – the "uncertainty" of the financial stability of the entire firm required the dramatic move of raising outside money. The Singapore government injected SFr11 billion, and an unnamed Middle East investor put in SFr2 billion. As a result, UBS has improved its tier 1 capital ratio to more than 12% from 10.6%

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